Study: Ethanol Mandates Causing Spiraling U.S. Food Prices

After more than 50 years of declining food prices, ethanol subsidies and mandates have caused a dramatic rise in U.S. food prices since 2005, data from the U.S. Department of Agriculture show.

The data were pulled together in a new study by FarmEcon LLC, an agriculture and food industry consulting firm.

Historical Price Trends Snapped

For more than half a century, from 1950 through 2005, U.S. consumers benefited from gradually declining food prices. Since 2006, however, prices have sharply risen, with a typical family of four now paying $2,055 more in food bills than would be the case if costs had kept to the 1950-2005 trend line.

Rapidly rising corn prices, caused primarily by ethanol subsidies and mandates, are the most important factor in rising food prices.

“Fuel ethanol production capacity, based almost entirely on corn as a feedstock, exploded from 2006 to 2009,” the study reported. “Demand for corn to supply the new plants also exploded. Corn production did not keep up with the higher demand, and corn prices have more than tripled since the mandates came into effect.”

“Corn is just one of many basic farm inputs used to produce the U.S. food supply. However, with increases in biofuel demand and declining corn production, corn prices have increased sharply. In turn prices of other major crops have also gone up significantly. This ranges from major field crops like soybeans and wheat, to horticultural crops such as potatoes, strawberries, and processing vegetable crops. Higher prices for other crops were necessary in order for those crops to compete with corn for land.… These higher commodity prices mean higher incomes for crop producing farmers, but also higher food production costs, higher consumer food prices, and increased food costs for family budgets,” the study explained.

Ethanol Harming Wider Economy

The study noted declining food prices benefited many sectors of the economy before ethanol mandates reversed the food price trend.

“Since 2006 this trend has reversed, and that reversal is the largest since 1950. Increasing food affordability has freed up income for spending on all other consumer goods and services, helping the economy grow and add jobs,” according to the study.

That is no longer the case, as food prices sharply rise.

Thomas E. Elam, president of FarmEcon LLC, says the study should help lawmakers decide the future of ethanol subsidies and mandates.

“This effort is primarily aimed at correcting distorted claims made by the biofuels industry and its special interest lobbying groups,” said Elam.

The study notes corn prices have more than tripled since 2005, due primarily to ethanol mandates. The diversion of money to corn production has sapped many other sectors of the economy.

“That spending diversion has contributed to the slow rate of improvement in unemployment, job creation, and thus total U.S. income,” the study concluded.

Congressional Choice

Without a dramatic increase in corn productivity, the only other possibility for food affordability relief is to amend renewable fuel mandates and lower ethanol production incentives, Elam warns.

“Since the advent of biofuels mandates, food has become less affordable in both absolute terms, and relative to the long-term food affordability trend. This significant change is a drag on our economy and partly the cause of the slow recovery from the 2008-2009 recession,” Elam said.